U.S. Implements Worldwide Export Controls on Quantum Computing, Advanced Semiconductor Manufacturing, and Advanced Computing Chip Technologies

On 5 September 2024, the Bureau of Industry and Security (BIS) of the U.S. Department of Commerce released the Implementation of Controls on Advanced Technologies Consistent with Controls Implemented by International Partners (the Worldwide Controls). The Worldwide Controls introduce a new concept in U.S. export controls that applies export controls on non-defense related items on a worldwide basis, namely in the fields of quantum computing, advanced semiconductor manufacturing, and advanced computing chip technologies.

Particulars of the Worldwide Controls; New IEC License Exemptions

The Worldwide Controls^[1] will take effect on 6 September 2024, subject to a grace period until 5 November 2024 for certain quantum items. They include a broad swath of the quantum computing, advanced semiconductor manufacturing, and advanced computing chip technologies fields, including long-awaited controls on Gate All-Around Field-Effect Transistor technology.

The Worldwide Controls represent a continuation of a recent trend by BIS to expand the extraterritorial nature of U.S. export controls. For example, U.S. export controls on the semiconductor ecosystem originally targeted the PRC^[2], then to third countries that used U.S. sourced technology to create controlled items bound for the PRC through the foreign direct product rule^[3], and finally on a blanket basis to non-Western third countries (mainly in the Middle East) apart from the PRC.^[4]

The Worldwide Controls apply to all jurisdictions apart from the U.S. as a general rule, subject to an important newly created exemption License Exception Implemented Export Controls (IEC). The IEC exemption applies to jurisdictions that BIS has deemed to have implemented export controls that are equivalent to that of the Worldwide Controls. A current list of IEC jurisdictions reveals they consist of only the G7 jurisdictions (i.e. Canada, France, Germany, Italy, Japan, the United Kingdom), along with Australia and Spain.^[5] For any other jurisdiction, the Worldwide Controls require a license from BIS prior to export.

The standard for license review is a case-by-case analysis at BIS’s discretion, except for Country Group D:5^[6] plus Macau, along with entities headquartered or whose ultimate parent is headquartered in such jurisdictions, which will be reviewed on a presumption of denial. The primary Country Group D:5 jurisdiction is the PRC.
 

Potential Implications of the Worldwide Controls on Non-U.S. Parties

The Worldwide Controls may have profound implications for non-U.S. technology start-ups, multinationals, and private equity and venture capital investors who operate or invest in the affected fields, or who rely on suppliers from the affected fields. U.S. export controls in emerging technological fields are no longer specifically targeted at the PRC, but now apply to the Middle East, Southeast Asia, and even Western jurisdictions (presently) such as the Netherlands, Ireland, Scandinavia, and South Korea.

As U.S. suppliers may be subject to both civil and criminal liability if they are in breach of U.S. export controls, and given recent high profile enforcement actions against them such as the ongoing criminal investigation of Applied Materials, non-U.S. parties operating in the affected fields should expect rigorous customer due diligence (CDD) and compliance undertakings from such U.S. suppliers. Based on BIS’s focus on the PRC, this CDD may focus on end users and may also work alongside other extraterritorial elements of U.S. export controls such as the foreign direct product rule.
 

For non-U.S. private equity and venture capital investors, awareness of the applicability of U.S. export controls on targets that seemingly have little to no connection to the U.S. is key to assess potential risks associated with the BIS’s licensure requirements for key U.S. suppliers. This, combined with the applicability of CFIUS for U.S. businesses (including U.S. subsidiaries of non-U.S. headquartered targets), and its implementation beyond PRC investors (e.g. Nippon Steel’s proposed acquisition of U.S. Steel), is key to optimize risk assessment in legal due diligence. The expanded application of U.S. rules in private equity and venture capital may also lead to the growing use of W&I insurance or the expansion of its scope to protect against U.S. regulatory risk.

For more information on how we can help you with U.S. corporate and compliance matters, please contact Charles Wu at Charles.Wu@clydeco.com